The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Baha Mar “doesn’t take away” from the Government outperforming its key revenue and fiscal targets, a credit rating agency yesterday disclosing that it was impressed by the more than three percentage point cut in the 2014-2015 fiscal deficit.

Renzo Merino, Moody’s country analyst for the Bahamas, told Tribune Business that he believed this nation’s debt-to-GDP ratio had “peaked” at 65.8 per cent and was now set to either stabilise or decline.

The rate of decline, he added, would depend on the economic growth rates the Bahamas achieved over the next several years, with the Government “a full year” ahead of its target for achieving a primary Budget surplus.

“What we’ve seen over the last year has been an improved fiscal consolidation achieved by the Government,” Mr Merino told Tribune Business.

“It has had a lot to do with the implementation of Value-Added Tax (VAT), which has boosted government revenues. Our understanding is that what was achieved in the first six months is a little beyond what they’d expected, and what we expected in terms of the total revenues it [VAT} would bring.”

He added: “The Government has shown some positive restraint in terms of expenditure. Spending has not increased as much, and that has allowed them to cut the deficit by what we consider a large amount - 3 per cent of GDP.”

Mr Merino said the trend towards lower fiscal deficits, as shown by the Government’s estimates for the 2014-2015 fiscal year, would lead to lower debt build-up and stabilise the debt-to-GDP ratio.

“Our expectation is that the debt has peaked, and will remain at current levels or reduce very slowly, which depends on growth levels,” he told Tribune Business.

“Baha Mar being open will add to revenues, but does not take away from what the Government is already making.”

The Bahamas is still grappling with a $6.3 billion national debt, but Moody’s yesterday provided some temporary relief by not following its colleagues at Standard & Poor’s (S&P) in downgrading this nation’s sovereign credit rating.

This will ease any pressures on the Bahamas’ ability to borrow in the international capital markets and the price (interest rate costs) it must pay, with all the implications that has for the Government’s debt servicing costs and ability to finance essential public services. And it also ensures that investor perceptions of this nation do not deteriorate further.

Moody’s country analysis of the Bahamas, written by Mr Merino and released yesterday, praised the Government for achieving “important progress” in its fiscal reform efforts.

In particular, he cited the fiscal deficit’s reduction from 5.8 per cent of GDP in the 2013-2014 Budget year to 2.3 per cent in 2014-2015, and the attainment of a primary Budget surplus a year ahead of schedule.

“This should contribute to the stabilisation of the debt trend, with the Government’s debt-to-GDP ratio peaking at 65.8 per cent at the end of 2014,” Moody’s said.

“A relatively successful implementation of a new VAT in January 2015 has also supported government revenues, which we estimate grew to over 20 per cent of GDP in 2014-2015 from 17.4 per cent the previous year.”

Moody’s acknowledged that the Bahamas’ debt-to-GDP ratio had “more than doubled over the last decade” to 2014, with the Government’s interest payments on its debt growing to 14.6 per cent of its revenues compared to less than 10 per cent prior to 2007-2008.

This had created “a somewhat limited fiscal space” that the Bahamas could employ to absorb future economic shocks.

Yet an impressed Moody’s conceded that the Government had beat both their initial fiscal consolidation targets.

“Although we had initially expected that the targets would be hard to achieve in the short-term in a context of subdued growth, in 2014-2015 the Government outperformed its first fiscal deficit goal,” Moody’s said.

“According to the figures presented in the 2015-2016 Budget, the authorities’ estimated a deficit of 2.3 per cent of GDP in 20140-2015, versus its previous estimate of 3.2 per cent, and down from 5.8 per cent in 20130-2014.

“Additionally, according to the estimates, the Government would have posted a primary surplus of 0.6 per cent of GDP in 2014-2015, a full year earlier than initially set under the medium-term consolidation plan. Given these fiscal results, we forecast that debt will peak in 2015, and the debt trajectory will stabilize thereafter.”

The credit rating agency added that VAT’s initial results suggested that the tax would generate more than the $250 million in net new annual revenues, equal to about 3 per cent of GDP, that the Government had projected.

“While the 2014-2015 Budget estimated that VAT collections would come to half of the annual target ($125 million), the actual performance of the tax exceeded these expectations, with some preliminary figures pointing to a net collection of about $200 million (2.3 per cent of GDP),” Moody’s said.

“This outperformance is partially explained by relatively high levels of compliance and VAT reaching a broader tax base than authorities initially expected.

“Overall, revenues increased over 20 per cent year-over-year according to the Government, and led to an increase in the revenue-to-GDP ratio of 2.8 percentage points to an estimated 20.4 per cent in 2014-2015.”

Still, it warned that spending control by the Christie administration was “key to reversing” the fiscal deterioration experienced by the Bahamas since the 2008-2009 recession.

“The increase in expenditures relative to GDP in recent years makes expenditure restraint key to reversing the deterioration of the fiscal accounts and to secure the success of the consolidation plan,” Moody’s said.

“High spending on social transfers and increased budgetary support to public- sector corporations have increased expenditures. The unemployment rate remains high, making reducing social transfers difficult. Additionally, with the increase in the debt burden there has also been a rise in interest payments that consumes a larger part of government revenues.

“Authorities have sought to improve the framework for public financial management and the enforcement of strict discipline and accountability in spending across all government departments. This in turn will contribute to restrain expenditure growth.”